Pensions
Well, well, well. I have given a couple of
presentations in Copenhagen and Stockholm about the Euro crisis. One of my
points is that the current situation regarding government finances also has a
lot to do with the fact that Europe’s baby boomers are retiring in large
numbers these years. It has been pre-programmed for years (about 60 years to be
specific) but politicians have too short an attention span to focus on it. Now
the story has been picked up by Bloomberg. Chapeau!
It goes to confirm that we have a number
of different problems occurring at the same time: Debt cycle reversal, cyclical
slowdown, badly capitalised banks, inadequate institutional design in Europe,
and the pension squeeze. If anybody wants to receive the slides from my
presentation, let me know.
Auctions
Tomorrow and Friday Spain and Italy will
sell up to 22bn of short and medium term bonds. The yields in that part of the
yield curve have dropped sharply since the beginning of December, meaning that
the refinancing costs will not increase as dramatically as the markets believed
just 3 months ago. In fact, the refinancing costs are far from being bad.
So I cannot understand why the headlines
continue to focus so much on the 10-year yields?? They have been volatile but
on average moving sideways for three months. Why is it that the headlines need
to focus on that as a sign of impending disaster when things are getting better
in the auctions? Sensationalism!
I wrote in November that place to watch is
exactly the Spanish and Italian bond auctions. As long as those two countries
can issue all the bonds they need at reasonable yields, we do not have a real
euro-crisis. We may still have a crisis, but it is not one driven by the euro.
If it were to happen that those two
countries cannot refinance their debts or that the yields they would pay
increased to a point where they cannot stabilise their debt/GDP ratio, we
should all head for the hills.
Banks - again
As the pressure is easing on the euro and
the sovereigns, it mounts on the European banks. Presumably, The ECB saw the
3-year loans to banks as a way of helping the banks to buy some government
bonds from Spain/Italy. It has worked. But now it appears that the banks also
want to use that money to refinance some of their own bond issues. It is
another sign that the region’s banks prefer to solve their lack of Tier 1
capital by shrinking their balances.
They prefer to shrink their activities
instead of raising new capital. UniCredito’s bungled rights issue is certain to
scare other banks from trying the same.
It will only undermine Europe’s growth if
the current credit shortage continues. At some point in time politicians will have
to understand that the banks do not play along as long as it is not in the
interest of their management and/or their shareholders. With an essentially
insolvent bank sector, I cannot understand that European politicians do not
begin to use some muscle. The banks are already dependent on government support
in one form or another. This is the moment to seize and to force fundamental
changes. The Swedish experience from the ‘90s still beckons as a good example.
The quote “Once You Got Them By The Balls,
Their Hearts and Minds Will Follow” is ascribed to Teddy Roosevelt. Barack
Obama missed his moment in 2009. Europe, anyone?
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